There is an inherent risk associated with every investor who invests in the stock market and this risk needs to be diversified for the optimum growth of the portfolio.
The health of the portfolio reflects and tells the growth story of the entrepreneur.
The overall growth should be above the market average which justifies your risk taken in it.
Here, I will discuss that how an entrepreneur should allocate her/his assets so that s/he is able to get the better returns in the future and helps in avoiding financial mistakes.
The asset allocation is the process of selecting the different asset categories of your interest and proportionately allocating the fund as per your financial goal.
I have written an e-book "How to realize your financial goals" which explains in detail about asset allocation and re-balancing.
Risk bearing ability
The type of the asset allocation depends on your financial goal and your risk-bearing ability. The higher financial goal and the higher risk bearing ability makes you invest in riskier assets.
Please review the following table based on the risk appetite of an entrepreneur as an individual:
I feel and understand that most of the entrepreneurs like me fall in between Moderate to the High risk bearing ability who want and try to get more than average return from the markets.
The different types of the assets are as follows:
Right asset allocation
You want to invest Rs. 1, 00,000 into the above mentioned asset categories in the following proportions:
Your overall portfolio falls under the category of Moderate to high risk.
You should keep in mind that you have to maintain your portfolio in the above-mentioned proportions that are 25% of your fund allocated to each category.
Assets will grow at different rates
Let us say that your assets grow over a period of 1 year at the following rates:
Now, you can see that the different growth rates of the assets have changed the assets allocation percentage of:
It is the process of restoring the original asset allocation through:
The simple method is to select the highest value of the asset like stocks: Rs. 31,250/- and make the value of the other assets the same by fresh buying, shown as follows:
However, you should not consider re-balancing with minor alterations in the assets allocation.
When you see that the asset allocation is changing by considerate amount, that it is changing its nature like shifting of the portfolio from High to moderate to low risk bearing capability.
In the last, when you see that you are approaching your financial goal then you need to make a change in your risk bearing abilities by shifting from riskier assets to the low-risk assets so as to secure your financial amount.
The importance of asset allocation lies in maintaining its allocation percentage with time so that your portfolio grows in line with your financial goals.
The asset allocation is a continuous process which requires both your time and energy and you should make a rule to re-view it regularly in order to achieve your financial goal.
You can track and analyze your portfolio in Google Finance or moneycontrol. Either you hire an expert to manage your portfolio or there a very good investment analysis software available in the market which fulfills the required need of an investment adviser, well it's all your choice.